David Gauke: We are in a precarious economic position, and the few politicians who recognise it seem unable to tackle it

David Gauke is a former Justice Secretary and was an independent candidate in South-West Hertfordshire at the 2019 general election.

Twice in the past dozen days, the country has had a reminder of its fiscal predicament.

First, on 2 July, Rachel Reeves shed tears as she sat next to Keir Starmer during Prime Minister’s Questions.  She had already had a difficult week as Labour rebels defeated her attempts to control the increasing costs of disability benefits.  Kemi Badenoch asked about her future; Starmer failed to reassure; the markets responded negatively.

The pound fell and bond yields rose in anticipation of a change of Chancellor.

A new Chancellor might mean new policies, such as looser fiscal rules.  Even the suggestion that this might happen was enough to increase the Government’s borrowing costs that would have resulted in an additional £7bn a year in debt interest had the higher costs been sustained. But the market movements were more than enough to ensure that the Prime Minister’s office made it clear that Reeves’ job was safe.

The market movements were reversed.

A week later came the second reminder – the publication of the Office for Budget Responsibility’s Fiscal Risks and Sustainability Report.  These reports have been published since 2011 and never make the cheeriest of reading.

We have long known that we are going to have an aging population which means more people receiving pensions and expensive healthcare paid for by relatively few people of working age.  Without policy changes, these reports have consistently made the case that demographic changes will drive up government borrowing and debt to levels that are unsustainable.

The latest OBR report, however, attracted more attention than many of its predecessors.  Coming days after the retreat on disability benefits, the OBR chief, Richard Hughes, summed up the situation by noting that “the UK cannot afford the array of promises it has made to the public“.  We already knew that we faced a substantial risk to the sustainability of the public finances; what has become clearer is that our politicians are unable or unwilling to address them.

One focus of the recent OBR report is pensions and, in particular, the triple lock.

This was introduced in 2010 and ensures that the state pension increases by the higher of inflation, earnings or 2.5 per cent.  In previous decades, the 2.5 per cent element would rarely be relevant – earnings or inflation would be higher.  But since 2010, earnings growth and inflation have been volatile.  As a consequence, according to the OBR, the triple lock has been three times more expensive than expected, set to cost taxpayers £15.5bn a year by 2029/30.

The triple lock was also looked at by the Institute of Fiscal Studies in its pension review that was published earlier in the month (I chaired its steering group).

The IFS make the point that even if one wanted to increase the value of the state pension, the triple lock does so in an unpredictable way.  By 2050, the policy might cost as much as £45bn or as little as £5bn.  This is not a policy that lends itself to providing fiscal certainty.

At some point we have to drop the policy, but at the last General Election the major parties all promised to maintain it for the next Parliament.  The IFS propose that the triple lock remains in place until the state pension reaches a specified percentage of average earnings, at which point it rises on average in line with earnings, but never below inflation in any one year.  This leaves the question of what that percentage should be, but is a sensible approach.

It does not mean that it will be pursued.  The triple lock is popular, with 75 per cent of people supporting it.  Politicians know that it is unsustainable (Mel Stride, as Work & Pension Secretary, explicitly said so and I very much suspect that Liz Kendall, his successor, agrees) but may not dare to do anything about it.  In our multiparty politics, it is even harder to today to build a cross-party consensus on this.  (Interestingly, Reform UK did not commit to the triple lock at the last election and there are rumours that in private gatherings that Nigel Farage has mused that it will have to be dropped, but would he resist the political opportunity of defending the triple lock if other parties sought to abandon it?  I doubt it.)

This is but one illustration of the situation we are in.

Any serious examination of the state of the public finances will conclude that we are going to have to find ways of reducing spending or raising more tax, or (more likely) both.  Serious politicians – and both Reeves and Stride are serious politicians – know this.  But serious politicians will also consider what they need to do to be elected or re-elected and there is little or no indication that the public as a whole is ready to reward serious honesty.

To put it another way, the job of a practical politician is to mediate between what needs to be done and what the electorate is willing to do.

As our fiscal situation becomes more serious but the electorate becomes increasingly angry at stagnant living standards, the gap between the two has become a chasm.  Rather than face reality, politicians are rewarded for simple but impractical answers.

Reform argues that there are vast savings to be made by sacking diversity officers; the left argues that a wealth tax will raise multiple billions from a very small number of people.  Being honest, setting out the real trade-offs, acknowledging that spending cuts will have real consequences, accepting that raising large amounts of revenue will require large numbers of people to pay more, is seen as politically impossible.

And it probably is, at least for now.  But the UK is uncomfortably exposed in the event of an economic crisis.  Of all the advanced economies, we have the fifth highest deficit, the sixth highest debt and the third highest borrowing costs.  As the OBR points out, the changing nature of the pensions market means that pension funds will be less likely to buy UK government debt in future, also driving up our debt interest costs.  The reaction to Reeves’ tears shows that the markets already see us as a risk.

A real, proper market crisis is, to put it mildly, not inconceivable.

It is a crisis we should want to avoid.  All those voters who claim that they have “nothing to lose” would quickly learn that, in fact, they did.

Brutal decisions on spending and taxes would be necessary, and there is no denying that lives would be blighted as a consequence.  We would get through it (look at Greece today and the progress it has made since the Eurozone crisis) but at some cost.  We do not want to put ourselves through this if we can help it.

The question is, can we help it?  Is it politically possible to take preventative action to put our public finances on a sustainable footing before a crisis hits?  Or will it take a crisis before the public (and, therefore, our politicians) recognise what needs to be done?  One way or the other, we are going to have to face up to fiscal reality soon.

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